4 Signs That Spell Doom For Traditional American Grocery Chains

Tyler Durden's picture

The grocery business in the U.S. is, and always has been, a fairly miserable one.  In fact, from A&P to Grand Union, Dahl's, etc., bankruptcy courts have been littered with the industry's failures for decades.

Of course the reasoning is fairly simple...razor-thin operating margins that hover around 1-3% leave the entire industry completely incapable of absorbing even the slightest financial shock from things like increasing competition or food deflation. 

 

Unfortunately, the industry is about to undergo a series of changes that will likely lay waste to the traditional grocery store model.  Here are a couple of the changes already in motion:

1.  Increasing Competition From Large-Format Discount Retailers

While you would think that an oversupplied market with abysmal operating margins would be immune from massive new capacity additions, you'd be wrong.  States all across the country added millions of square feet of grocery capacity in 2016.

 

Moreover, as Bloomberg points out today, large European discount grocery retailers, like Lidl and Aldi, are also looking to build a large presence in the U.S. market over the coming years.

An invasion is getting under way. Lidl, a German retailer known for low prices and efficient operations, is expected to start an aggressive U.S. expansion in the coming weeks that could open as many as 100 new stores across the East Coast by the summer of 2018. The company, which runs about 10,000 stores in Europe, has also set its sights on Texas, one of the most competitive grocery markets in the U.S. Analysts expect Lidl to expand to nearly $9 billion in sales by 2023.

 

Lidl is slated to open 20 locations in Virginia, North Carolina, and South Carolina this summer and could reach 630 locations over the next six years, according to Kantar Retail. The company had sales of roughly $69 billion last year. Expect Lidl's entrance into the U.S. to ramp up the price war and possibly force smaller, regional companies to close or consolidate. "It's definitely making the regional players nervous," said Bartashus. "It's like a stack of dominoes; it takes one thing to tip it, and they all start moving in one direction."

 

2.  Competition Continues To Grow From Every Other Retail Format From Dollar Stores To Pharmacies

Dollar stores have been stealing share from traditional grocers for years and the pressure does not seem likely to abate anytime in the near future.

More food is sold in more places these days, with pharmacies and dollar stores looking to groceries to lure customers. Dollar General alone added more than 900 stores last year, ending 2016 with more than 13,000 locations. The chain, which generates roughly 75 percent of revenue from consumable items such as food, soap, and paper towels, is planning to open another 1,000 stores this year. CVS, which operates nearly 8,000 standalone locations, is betting on food to boost store traffic. Like other pharmacies, where shoppers would traditionally visit to pick up deodorant along with a prescription, the chain has boosted its food offerings to add more healthy snacks and grab-and-go options.

 

Because of their smaller footprints and labor costs per square foot that are a fraction of a traditional grocer's, dollar stores can offer consumers lower prices and still earn 3x higher margins than a regular grocery chain....all of which makes it likely that they'll continue to steal share.

 

3.  Food Price Deflation

Meanwhile, food price deflation continues to wreak havoc on already razor-thin margins.

 

4.  'Smart Stores' Will Ultimately Revolutionize The Traditional Retail Grocery Market

Finally, while Amazon, and others, have yet to make meaningful progress penetrating the traditional grocery market, their success is a matter of when, not if. Concept stores, like Amazon Go, already exist that virtually eliminate the need for dozens of in-store employees which will allow them to generate higher returns at lower price points than traditional grocers.  Meanwhile, other grocery concepts, like drive through pick up, are certain to take some share over the coming years as well.

 

And while the demise of the traditional grocery store will undoubtedly take time (recall that people were calling for the demise of Blockbuster for nearly a decade before it finally happened), make no mistake that the retail grocery market 10-15 years from now will not include many of the well-recognized companies that consumers visit weekly as of today.

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VWAndy's picture

 Yea good luck competing with a company like Amz that dont need to make a proffit.

HooRAY4rSIDE's picture

Soylent Green is PEOPLE!

Antifaschistische's picture

Grocery stores deserve to die.....funneling humans through a store with all their marketing BS like we're cattle in a chute....hiding products on "irrational" isles so we'll have to wander around in desperate search of the Cajun Seasoning!!   screw them...stores so large you need to bring a water bottle to walk across the sun scorched asphalt...then you need to wear  your tennis shoes because you're going to walk a mile to fill up your little basket.  Do libtards like that braindead shopping experience!!  Why do you have to have a MEMBERSHIP at the stupid place to get a decent price!!  Why's all the stuff EVERYONE  needs on the BACK FREAKIN WALL!!  It's all the exact opposite of customer convenience....and PEOPLE SEEM TO LIKE IT!!!

screw all that...I get everything I can off of walmart.com (and I hate walmart!) but I don't need a "membership" to buy stuff there.

froze25's picture

Not having to deal with those people is pretty sweet too.

DownWithYogaPants's picture

Amazon is going to deal in canned and dry goods.

I'm not so sure a healthy eater will prosper with them.

No Time for Fishing's picture

Give me a small fast convenient place to buy my high quality fruits, vegatables and meats and drop the rest of it off at my door cheaply. 

ToSoft4Truth's picture

You're right...

 

1. Large-Format Discount Retailer

 

Aldi's has a smal foot print.  I like Alidi, I can breeze through.  The no bag thing is extreme but then I only buy what I can carry. 

 

The Kroger offers a 1/4 mile+ hike from the bread to milk and back to U-Scan. 

sonya55's picture

You are correct, I am giving up my car(-$450, per month on a $260 lease paid off in nov.) after I move close enought to walk to Aldi(City Hall ,my dentist, library, hardware store, Chinese restarunt,  and my hair stylist.)

 Might get a $60 a month bus pass, might not.

Fuck it, I just dont care,  any time now I expect my coworkers to devolve to the point where they drop their pants shit in their hands and throw it at me.

tmosley's picture

>operating margins of 1-3%

Pretty sure this is a lie, or a figure for some specific segment of good that they sell. Good friend of mine buys an enormous amount of meat for his business and the butchers at chain stores cut him deals like you wouldn't believe (half off or more) and claim they are still making a 30% profit.

No business could possibly survive on such thin margins, except maybe something absolutely enormous like Walmart.

newdoobie's picture

Stores usually make around 20 - 25% above cost of item. Now subtract lights lease labor loss, see what I mean? A couple of screw up's in distribution and a stores profit for the year can tank. Dollar G makes a living using vendors to deliver consumables, like milk and ice cream. That lowers cost of labor, a big item, of course you have to be willing to buy almost out of date products that they stock themselves. On time stocking is not as easy as it sounds. Huge losses in distribution.

 

You also have to be willing to buy Froot Lupes.

Overfed's picture

That's all well and good if you can stand living in a city. The cars and equipment that I accumulate, along with the gunfire and random explosions, tends make me unwelcome in most neighborhoods.

Shinebama's picture

We have plenty of neighborhoods with gunfire and random explosions here in Shitcago, you'd feel at home.

Mother Of All Bomb's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

Overfed's picture

Well, neighborhoods where I would want to live anyway.

IntercoursetheEU's picture

Grow your own, and move if you can't.

Half the crap in these stores is either poisoned by pesticides or not really food.

Delving Eye's picture

Exactly. Dollar Stores for food? CVS for healthy snacks? Seriously???

AGuy's picture

"Give me a small fast convenient place to buy my high quality fruits, vegatables"

That would be a grocery store!

Adahy's picture

Seriously, go to the farmers' market people, they are all over the place.
Eat like a king.
Bonus:  You get to deal with nice, genuine, knowledgeable people who can tell you anything you want to know about how their product was produced.
The opposite of what you get virtually everywhere else.
I'll see you there!

blueberry100's picture

the McDon in my small town never ever stops shoving crap out of drive thru & the line of cars yelling in the speaker never stops, ever.   Last thing I ate at Macs was a fish sandwitch in 1984m cost 39 Cents.... Hey I'm still alive ..lol

SmokeyBlonde's picture

In my locale, AMZ offers 2-hour delivery to include fresh fruit, veggies, dairy, and frozen products so don't be so quick to dismiss them ...

Rusty Shorts's picture

I just got back from Cuba, I wished I could post some pics of their grocery stores from out in the campo. I really like what they have done to simplify their shopping choices...

TBT or not TBT's picture

They got nothing on the Norks and Venezuelans though.  

esum's picture

CUBA
7 IN 10 PREGNANCIES ARE ABORTED CAUSE ITS SUCH A GREAT PLACE AND IT HAS ONE OF THE WORLD'S HIGHEST SUICIDE RATES...
How big a store do you need to sell RICE BEANS AND CHICKEN...

Falling Down's picture

It's a marketing ploy, plus the chains get to sell your purchase info to third parties.

It's all BS.

Mazzy's picture

You lost me at Wal-Mart.  Up until then I was feeling the sentiment.

Why do you feed the beast?  It feeds you cheap poisonous food and you feed it federal reserve notes.

Wal-Mart's existence is a symbiotic relationship with it's customers, but which is parasitic bacteria?

lincolnsteffens's picture

It doesn't matter how big the super store there are still only a few isles worth selecting from. Now the monster parking lot is another thing. I'm lucky though, a whole foods store and a modest good chain supermarket 1/5 mile away I could walk to or manageable sized parking lots.

deth's picture

So, you think grocery stores are liberal AND you shop at Walmart. Try this, shop the perimeter of the grocery store for Whole Foods (or something close to it).

newdoobie's picture

I work in the Grocery bussiness, Whole Foods is a giant rip. Yuppy scum paying big time for the same crap as dollar G.

 

Just take a bunch of off brand shit, tag it 'Natural' and charge 4x's cost. Beautiful!

sonya55's picture

That where the mind control of doom pron started for me

HRClinton's picture

The market is getting bifurcated / buy-forkated into Trader Joe and Trader Hoe.

gimme soma dat's picture

Just shop at the Dollar Tree. 

ZD1's picture

Too bad most of them are ghetto full of FSA using their EBT cards.

imapopulistnow's picture

Aldi and Lidi will be killing it. Walmart is the dinosaur. Dollar General is your 7/11 convenience store. Kroger is your Macys. Amazon your millennial, too awkward to go shopping in public alternative.

No_More's picture

We've now got an Aldi going head to head with a Wal-Mart SuperCenter and a Target near the town where I like to go shopping (30 minute drive from my rural home)

Finally cheaper prices of fruits, vegetables, meats, dairy. I pretty much skip the processed foods so coupons are mostly a waste for me.

And Amazon Prime/Fresh are a boon to people who are caregiving elders. If you can't leave the house much, it's handy to have non-perishables brought to your home.

The little Food Lion & Sav-A-Lot in my closest small town have a very dubious future ahead. Sad but true.

newdoobie's picture

The ROI on big box stores is killing them. That's why you see the Walmart Neighborhood market and Targets Express stores popping up everywhere. ROI is awesome, the maintenance on refrigeration machines is much much less.You'll notice in Germany the Aldis have their refrigeration modular hanging off the side of the building. (like little window Ac's)

 

Biggest cost in a grocery store is the running and maintenance of refrigeration.

NoPension's picture

Aldi is great. Excellent quality, lowest price.
Their shopping cart system is the greatest. Put in a quarter to release the chain. When finished loading, return the cart ( to the store's front entrance), insert chain and get your quarter back. No carts in the parking lot...no employees rounding up carts. Everybody wants their quarter back!

vealparm's picture

Some grocery store chains in northern NJ had that .25 cent cart system 25 years ago....after a while they were all broken and trashed. They went back to the standard system.

Curiously_Crazy's picture

How does that happen though?

You put your coin in, in the store - it sits in the lock/container thing and is with you the whole time. When you bring your trolly back and put the chain into the lock your money pops out.

It would take 100's of times more effort to smash it out than just bringing the trolly back inside the store.

I've not seen that happen in the 15 odd years it's been used in some stores around Australia.

newdoobie's picture

homeless people can buy a house and transportation for a quarter!

 

Curiously_Crazy's picture

"No carts in the parking lot...no employees rounding up carts. Everybody wants their quarter back!"

Yep, and even with the lazy sods that don't take them back there are still no trollies/carts in the carpark because there's always someone who eventually will.

Shpedly's picture

Aldi has some good deals but by the tme you factor in the drive time and gas, your saving nothing. Most people shop a grocery store for everything they need. That's never going to change. Nobody has time to get their veggies from one place, their meat from another and their sundrys from yet another. This article is horse shit.

HalinCA's picture

Well ... then again if you have particular standards for certain items, you do hunt around for the best consistent place to find them. Avocados, for example. Some stores just can't seem to buy good ones consistenly. Some do.

But for most stuff, I agree. I live in Detroit and rural upstate NY.

Aldi rocks, but I don't get avocados there ...

Shpedly's picture

Oh I'm very particular about what I buy. Wife thinks I'm a nut case. The Aldi around here isn't worth the trip for anything. Best avocados I can find are the 5 pack at Sams. Aged correctly, they are the best I've had at half the price of the grocery store.

newdoobie's picture

Men and women shop differently. Target has a detection system that tracks people and their habits. They know if your wife is pregnant before she tells you.

 

https://www.forbes.com/sites/kashmirhill/2012/02/16/how-target-figured-o...

CNONC's picture

Actually, many people do shop multiple stores.  My wife goes to at least four different stores to accomplish the grocery shopping.  When I was in the service, I remember young women, dependent wives of junior enlisted guys, who would shop at the commissary with a fist full of coupons, and then head downtown and hit every grocery store in town, buying only their advertised loss leaders.  Those girls knew how to stretch a paycheck. (an E3 back then had a base pay of about $700 a month)

BarkingCat's picture

I would eat my shoes before buying food from Amazon

sessinpo's picture

Just buy your shoes from Amazon and you get the best of both worlds. lol